A presentation on the state of early stage startup investing given to the Silicon Valley Innovation Center in March 2014.

1. Early Stage Internet/Mobile Investing:
Trends and Strategies
David Shen
Launch Capital
March 2014

2. TRENDS
Internet/Mobile

3. Internet Seed Funding SF Bay Area
Source: http://www.cbinsights.com/blog/wp-content/uploads/2013/07/bayareainternet.jpg

4. Seed Deals, All Regions
Source: http://www.cbinsights.com/blog/trends/venture-capital-report-2013

5. Mobile Seed Funding SF Bay Area
Source: http://www.cbinsights.com/blog/wp-content/uploads/2013/07/bayareainternet.jpg

6. Mobile Deals, All Regions
Source: http://www.cbinsights.com/blog/trends/venture-capital-report-2013

7. Halo Report on Angel Investing Q3 2013
Source: http://www.svb.com/halo-report-q3-2013-infographic/

8. 1H 2013 M&A Dynamics Online/Mobile
Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx

9. 1H 2013 M&A Online/Mobile
Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx

10. 1H 2013 M&A Online/Mobile
Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx

11. Corporate M&A has fallen dramatically in 2013;
Deal volume and prices are down to levels seen during recession
Source: NVCA 2013; BerkeryNoyes
Notes:
• M&A transactions in 2013 have dropped
significantly both in number and value.
• The mean M&A value in the
internet/mobile space was ~$23m
in 1H ‘13 down from ~$35m in 1H
’12 & ~$51M in 1H ’11
• 61% of transactions were sub-$20M
• Continue to see two types of liquidity
events in Silicon Valley and NYC (less so in
Boston)
• HR Acquisition: Large companies
are purchasing 2 and 3 person start-
ups for the engineering talent
• Later stage VCs providing liquidity
to the market via buyout of founder
and early investor stock for top 5
venture backed companies
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
0
20
40
60
80
100
120
140
M&A Transactions
M&A NOT Disclosed M&As Disclosed

12. OTHER TRENDS
Internet/Mobile

13. Mobile Rising Aggressively vs. Desktop
Source: http://www.kpcb.com/insights/2013-internet-trends

14. China Mobile Internet Access
Source: http://www.kpcb.com/insights/2013-internet-trends

15. Rise of Crowdfunding
JOBS Act
July 10, 2013
SEC Chairperson Shapiro: New
offering created called a 506(c)
which allows companies to
freely advertise fund raising to
the general public.
More to come…

16. Crowdfunding Part II:
Kickstarter/Indiegogo/Medstartr

17. Rise of the Accelerator
422 Accelerators in
the US
Souce:
http://www.f6s.com/programs/un
ited-states?type=accelerator

18. Explosion of Startups
2009: 472
2010: 770
2011: 1065
2012: 1749
Source: https://www.cbinsights.com/blog/seed-investing-report

19. Series A Crunch
2009: 418
2010: 515
2011: 703
2012: 692
…leading to more bridge rounds or death of startups who can’t land
their A… Number of Series A VCs has not increased; if anything it has
decreased.
Source: https://www.cbinsights.com/blog/seed-investing-report

20. 2013 Estimated “Series A Crunch”
20
Notes:
• Entire venture industry is now shifting due
to this crunch.
• Companies raising much larger seed
investment rounds to extend runway
• Seed investors forced to support
companies longer
• Seed investors forced to proactively
shut down underperforming cos.
Source: CrunchBase
Funding
Gap 177 113 336 635 1681
799 821
1205
1558
2510
622 708
869 923
829
0
500
1000
1500
2000
2500
3000
2009 2010 2011 2012 2013 YTD
Pending Series A Funding Gap
Seed + Angel Series A

21. Explosion of (Digital) Seed Investors
• Groupon, Facebook, LinkedIn, Twitter go public.
• Secondary markets allow early
employees/founders in private companies to exit
with $millions in their pocket – circa 2011.
• Acquisitions of startups pay out to founders –
they become angels.
• New VCs raise seed funds.
• Private Equity/Investment Bankers enter the fray
with Wall Street money.
• International investors!

22. Founders and Ideas
• Smart, energetic founders are a commodity.
• Seasoned entrepreneurs are not.
• Great ideas are a commodity.
– It is too easy to come up with good/great ideas.
• Awesome ideas that no one else is working on
are not.

23. Competition
• Too easy and cheap to create software.
– Already leading to the explosion of internet startups
• The search for “no competitors”
– OK with old traditional, offline competitors.
– Don’t want other startups competing with the same
or near idea.
• Battle for attention -> Everyone is your
competitor
– Too many startups chasing after the same
customers, B2B or consumer. Battle for attention=too
long to get to breakeven or next round.

24. Design/User Experience
• Great design/UX required, but it is also a
commodity and too easily duplicated.
– Assuming you can find and hire a great designer
• Advantage is usually short term only.

25. U.S. Early Stage Valuations 2006-2013
• 2006: $2-3M pre
• 2007: $3-4.5M pre
• 2008: $2-2.5M pre (economic crash)
• 2009: first $5M capped note appears from YC
• 2010: $6-8M capped notes
• 2011: $8-12M capped notes
• 2012: $6-8M capped notes
• 2013: $5-6M average, upwards to $8M+ capped
notes

26. Fueled by New Investors
• New angel investors replace those who slow
down
– IPOs create new wealth
– PE and Investment Bankers getting access
• New seed funds are being raised each year
• All new investors take what the market gives
them – they have no history to draw upon

27. Early Stage Bubble
• Bubble exists in early
stage only
• Risk vs. reward does not
match
– Estimate 1 in 20-40+ for
hit, most die
• Early stage VC doesn’t
have great incentives
with this kind of data
• Angels can still make
some money if valuation
is good enough but VERY
hard to pick
• Acquihires are a great
way to lose money

28. “No matter how much we want to go on and on
(and on) about how cheap it is to start a company
these days, actually building a sustainable
company has never been more expensive. Venture
studies show the time and money it takes to get
public are longer and higher than ever before.”
“A rare defense of venture capital classic”
- Sarah Lacy, PandoDaily
Source: http://pandodaily.com/2013/08/30/a-rare-defense-of-venture-capital-classic/

29. Funding round $ vs. Runway
• Too many raising not enough
– Seed rounds going $1+M, upwards of $2M
• Acquiring customers take too long
– Consumers deluged by apps; B2B sales cycles
taking longer – 12+ months
• Takes 24-30 months to develop an idea.
– Get to breakeven or metrics worthy of the next
round.

30. Super Sized Seed Rounds
Source: http://www.cbinsights.com/blog/trends/seed-venture-capital-super-sized

31. THANKS!
David Shen
dshen@launch-capital.com